Unpegged: Economist React to China Yuan Announcement

-”The PBOC announcement Saturday is of great significance. This ended the fixed yuan exchange rate policy adopted amid the financial crisis during the past over 20 months. This marks the beginning of a new era. China is back to the exchange-rate reform path which began in July 2005…The decision was made based on China’s own economic situation and judgment on international economic situations. This is not a forced decision because of pressures. This is China’s independent decision.” – Li Daokui, member of People’s Bank of China monetary policy committee.

-“I think it signals we are going back to something like what was in place from 2005-2007. There might be a less aggressive pace of appreciation than last time…They are obviously very cautious. They are worried about Europe, and the trade surplus is quite a bit lower.” – Stephen Green, Standard Chartered

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-“We believe this is a positive gesture suggesting the [yuan] will soon resume its appreciation against the [dollar], possibly through downward movements in central parity rates as well during intra-day trading…We have long held the view that de-pegging from the [dollar] and moving to a more flexible exchange rate regime is the right thing for the Chinese government to do, not the least because of the foreseeable trade protectionist pressures.” – Helen Qiao and Yu Song, Goldman Sachs

“Don’t expect sudden, sharp movement in the yuan exchange rate. The yuan movement will be gradual based on market principles.” – Xia Bin, member of People’s Bank of China monetary policy committee.

“The timing of the statement will naturally be linked to the forthcoming G20 meeting, President Obama’s recent letter calling for market-determined exchange rates, and a nearly 3-month delay in the U.S. Treasury’s bi-annual currency report originally scheduled for 15 April…The existing daily trading band, if fully utilized, would permit significant appreciation. So there is no need for China to make radical changes to its existing FX policy if it wanted to meet the demands made by foreign critics…However, China is unlikely to abandon its policy of gradualism…And the strong [dollar], especially against the [euro], makes it difficult for the [yuan] to appreciate rapidly…A more flexible [yuan] will be welcomed by some of China’s critics. But it is clearly unlikely to appease those calling for large revaluation…There is accordingly no change to my call for around 3% annualized appreciation against the [dollar] over the next year.” – Ben Simpfendorfer, The Royal Bank of Scotland

“The statement strikes exactly the right tone in terms of placating critics of yuan policy over the past two years whilst avoiding a deliberate invitation of speculative inflows. We believe the likely reality is that the yuan will appreciate by more than the statement implies over the remainder of this year and into 2011. Again, for China to maintain a degree of equilibrium in its balance of payments, the currency will need to appreciate sufficiently to mute the commodity price effects resulting from its ongoing successful domestic policies. As a rough estimate, the pace of appreciation is therefore likely to match the import prices in the medium term…By allowing a gradual appreciation of the yuan, China will be sharing more of its growth with the rest of the world. The move by China is likely to underpin a strengthening of the non-Japan Asia currency complex and reinforces our key global anchor theme of a tri-policy dynamic unfolding in which Europe leads with fiscal policy, the U.S. leads with monetary policy and non-Japan asia leads with currency tightening.” – Glenn Maguire, Societe Generale

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